Intergenerational Transfers and Savings

What is the main explanation for savings? Is it primarily accumulation for retirement as claimed by Albert Ando, Richard Brumberg, and Franco Modigliani in their celebrated Life Cycle Model of Savings? Is it primarily intentional accumulation for intergenerational transfers? Or is it primarily precautionary savings, much of which may be bequeathed because of imperfections in annuity markets? The answer to the savings puzzle has many policy implications and is key to understanding the distribution of wealth. A major piece of the puzzle is the quantitative importance of intergenerational transfers to the accumulation of wealth. As I will argue there is strong evidence that intergenerational transfers play a very important and perhaps dominant role in U.S. wealth accumulation. This does not mean, however, that intentional saving for gifts and bequests is the main motive for savings. Significant intergenerational transfers could also arise in the Life Cycle Model in the absence of well-functioning private annuity markets or close substitutes for such markets. In such a setting, bequests would be involuntary and potentially quite sizeable. Let us first look at the evidence on the importance of intergenerational transfers and then turn to the deeper question of why such transfers arise.